Why
do they need to do an appraisal? – Part 2 of
2
We
have discussed why it is necessary for a lender
to obtain a formal appraisal of a property, and
that this is being done for your benefit as well
as the lender’s. I think it would be interesting
and beneficial to know who does appraisals and a
little about the process they use.
First,
appraisers are usually required by state law to
be licensed, to have a requisite amount of education
and experience, to take tests to assure their competency,
and to take continuing education to keep their skills
up-to-date. When the appraisal is delivered to the
lender, a copy of the current license will be a
part of the report. Note that the estimates of values
that are provided by real estate agents are specifically
not appraisals. They terminology used to describe
their reports is a Comparative Market Analysis.
The CMA of an expert agent is almost certainly
pretty accurate, and you will find it necessary
to have these data and the agent’s opinion of value
in preparing your offer to purchase, but it is not
an appraisal and your lender cannot use it.
Fundamentally,
the appraiser uses several techniques to arrive
at a value. One method is the estimate the cost
to rebuild the home. They try to figure out what
the value of an empty lot would be and what the
costs would be to construct the home, and then make
adjustments for the age and condition of the home.
Another method, used in the case of income producing
properties that you might purchase as a rental property,
is to estimate its income producing potential based
upon rental rates in the area. It would also contain
operating expense information.
The
most important process though, is to analyze recent
sales of comparable properties. The appraiser’s
task is to examine all the data on recent, nearby
sales, and to select the three, four, or five properties
that are most comparable to yours. Then the appraiser
compares the size and features of the properties
and makes adjustments to equalize them. For example,
let’s assume that the home being appraised is 2,000
sq. ft. in size, and that a recent sale down the
street was a 2,100 sq. ft. home. The appraiser would
adjust the subject’s value down to account for that
difference. If the subject has a larger lot, however,
then its value would be adjusted upwards. Similarly,
the appraiser would look at other factors that impact
on value, such as age, condition, the desirability
of its location, any amenities such as a swimming
pool, and, perhaps, a view, and then adds up all
the adjustments with each comparable to arrive at
the estimate of value for the subject.
The
appraiser also inspects the property and looks for
signs of damage or evidence that the roof might
be leaking. Usually these inspections are perfunctory,
but all real estate professionals know of instances
where an appraisal has uncovered problems that were
important to a buyer’s decision.
When
you get your copy of the appraisal, and under the
law you are entitled to a copy, sit down and review
it with your agent. You might also want to drive
by the other properties listed in the report so
you can see directly what other people have been
willing to pay for similar properties. Does it
affirm your feelings about the value you offered,
or does it raise questions?
In
summary, the opinion of a professional appraiser
is an important consideration in the homebuying
process.
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